Southwest Airlines 2013 Annual Report Download - page 94

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For the effective portion of settled fuel hedges, the Company records the associated gains or losses as a
component of Fuel and oil expense in the Consolidated Statement of Income. For amounts representing
ineffectiveness, as defined, or changes in fair value of derivative instruments for which hedge accounting is not
applied, the Company records any gains or losses as a component of Other (gains) losses, net, in the Consolidated
Statement of Income. Amounts that are paid or received in connection with the purchase or sale of financial
derivative instruments (i.e., premium costs of option contracts) are classified as a component of Other (gains)
losses, net, in the Consolidated Statement of Income in the period in which the instrument settles or expires. All
cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the
Consolidated Statement of Cash Flows, within Changes in certain assets and liabilities. See Note 10 for further
information on hedge accounting and financial derivative instruments.
The Company classifies its cash collateral provided to or held from counterparties in a “net” presentation
on the Consolidated Balance Sheet against the fair value of the derivative positions with those counterparties. See
Note 10 for further information.
Software capitalization
The Company capitalizes certain internal and external costs related to the acquisition and development of
internal use software during the application development stages of projects. The Company amortizes these costs
using the straight-line method over the estimated useful life of the software, which typically ranges from five to
fifteen years. Costs incurred during the preliminary project or the post-implementation/operation stages of the
project are expensed as incurred. Capitalized computer software, included as a component of Ground property
and equipment in the accompanying Consolidated Balance Sheet, net of accumulated depreciation, was $357
million and $256 million at December 31, 2013, and 2012, respectively. Computer software depreciation expense
was $90 million, $59 million, and $55 million for the years ended December 31, 2013, 2012, and 2011,
respectively, and is included as a component of Depreciation and amortization expense in the accompanying
Consolidated Statement of Income.
Income taxes
The Company accounts for deferred income taxes utilizing an asset and liability method, whereby deferred
tax assets and liabilities are recognized based on the tax effect of temporary differences between the financial
statements and the tax basis of assets and liabilities, as measured by current enacted tax rates. The Company also
evaluates the need for a valuation allowance to reduce deferred tax assets to estimated recoverable amounts.
The Company’s policy for recording interest and penalties associated with uncertain tax positions is to
record such items as a component of income before income taxes. Penalties are recorded in Other (gains) losses,
net, and interest paid or received is recorded in Interest expense or Interest income, respectively, in the
Consolidated Statement of Income. Amounts recorded for penalties and interest related to uncertain tax positions
were immaterial for all years presented.
Concentration risk
Approximately 83 percent of the Company’s full-time equivalent Employees are unionized and are covered
by collective bargaining agreements. The Company manages this risk by maintaining positive relationships with
its Employees and its Employees’ Representatives. Substantially all of the Company’s unionized Employees,
including its Pilots, Mechanics, Customer Service Agents and Customer Representatives, Ramp, Operations,
Provisioning, and Freight Agents, Flight Attendants, Materials Specialists, Flight Simulator Technicians, and
Facilities Maintenance Technicians are in discussions on labor agreements. These Employee groups represent
approximately 82 percent of the Company’s full-time equivalent Employees as of December 31, 2013.
The Company attempts to minimize its concentration risk with regards to its cash, cash equivalents, and its
investment portfolio. This is accomplished by diversifying and limiting amounts among different counterparties,
the type of investment, and the amount invested in any individual security or money market fund.
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